Licensing guide for businesses


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Licensing guide for businesses

  1. 1. ACCESSING INTERNATIONAL MARKETS A Guide to Successful Licensing54022 UKTI License BroAW.indd 1 14/01/2011 16:50
  2. 2. INTRODUCTION Why A LicenSinG Guide? Trading internationally is good for business and It shows how adopting a structured approach if approached correctly it can be very profitable. can reduce some of the risks. It also highlights This guide has been produced to provide a basic the various sources of advice and other assistance introduction to licensing and franchising. It will help that UK companies can access – both from UK UK companies who are considering developing further Trade & Investment and other partners. their interests in overseas markets – particularly those This guide has been produced by UK Trade & thinking about licensing or franchising. UK Trade & Investment in conjunction with Virtuoso Legal, a Investment provides a range of services to help UK boutique law firm specialising in intellectual property, companies develop business in overseas markets, not licensing and franchising. UK Trade & Investment is the only for those companies looking to export products UK Government organisation that helps UK companies or sell services into their chosen markets, but also for trade successfully in international markets. It comes those thinking of establishing a permanent presence to you free because we are committed to helping UK in an overseas market as a means of accessing companies trade profitably and effectively overseas opportunities in that particular country or region. and that always means evaluating the most beneficial Investing in an overseas market is often both approach to accessing customers in those markets. complex and risky. The purpose of this guide is In this guide you will find a range of useful tips - to help UK companies understand how they might other information including access to training and reduce some of the risks associated with licensing support can be found by visiting our website and maximise the opportunities to benefit from this at type of investment. Who ShouLd uSe it? This guide is aimed at UK companies of any size who are seeking to capitalise on overseas opportunities. In particular, it is aimed at those companies who are looking to take their international business a stage further than simple exporting and who are considering whether licensing might be the best next step for them to expand further. This guide can be used by both manufacturing and service companies, by companies with no experience of the market under consideration and by those who are already trading with the target market. Likewise, the guide can be used by your management team as a useful planning tool or by a UK company already planning further international expansion. While the guide focuses on licensing and franchising, much of the material is equally relevant to other forms of overseas investment, for instance establishing a joint venture or a wholly owned subsidiary. 02 UKTI LICENSING BROCHURE54022 UKTI License BroAW.indd 2 14/01/2011 16:50
  3. 3. AN INTRODUCTION TO LICENSING Licensing is often poorly understood, RoyALty StReAmS And VALuAtionS especially in some of the new and of inteLLectuAL PRoPeRty One of the most common questions asked is “What emerging economies of the world. is a particular piece of technology worth in terms of it does, however, offer businesses outright sale value?” or indeed “When licensed, what a very real opportunity to maximise could one expect as a royalty stream?”. A number of factors affect this and it is essential to take expert income streams on technology and advice. It is extremely difficult to value intellectual to exploit technology in new markets. property and it is a very different process from valuing bricks and mortar. With tangible assets such mAkinG money fRom technoLoGy as commercial buildings there will be an acceptable norm in any particular locality for a type of building. Licensing is basically the grant of a right to do Unfortunately, technology is often unique in the market something, usually in return for a payment – also place and it can therefore be a complex and time known as a royalty. The situation in respect of licensing consuming process to fix any sort of value to it. is analogous to someone owning a house and letting To a certain extent the same happens with royalty different parts of the house to different tenants. As streams, although different industries do have accepted with a multiple occupancy building, different tenants norms as royalty values. A number of accountants and can be granted a variety of rights to occupy, exploit solicitors specialise in this area and it is important to and use some parts of the property. However, a licence get the right advice early on so that negotiations can does not grant the tenants any rights in the physical proceed on a proper commercial basis. bricks and mortar of the property. The licensee has the right to use the patent, know-how, trade mark, design Factors affecting the value of technology will include right or copyright etc, but the licensee does not own the cost of creating the technology, the uniqueness the legal title to it, nor (unless specifically permitted of the technology, barriers for other people entering by the licence) are they often granted rights to grant the market, whether or not the technology can be sub-licences of the intellectual property. licensed and so on. When considering licensing it is vital to consider the income streams that are likely to Most people are vaguely aware of licensing through be generated once the product is licensed. Obviously, the software industry. At some point most people will products with mass market appeal can generate huge have “clicked” to accept a Microsoft software licence income streams even if the royalty payable on each or something similar. In fact, the wealthiest companies individual item is very small. On the other hand, today are ones such as Microsoft and IBM who depend technology which is in a niche arena may attract a on “clicks not bricks” as assets. Licensing is therefore much higher individual percentage royalty payment much more widespread than would first appear. simply because it is not capable of mass exploitation. Licences are widely used in the automotive industry. Licensing allows a car manufacturer to invest a great deal of resources in developing new technology, such as new brakes or gearing, and then to licence this technology to other car manufacturers in return for a royalty. This type of cross-licensing is widespread and by collaborating in this way many manufacturers can recoup the costs of research and development much sooner than they would by simply using the technology purely to their own advantage in their own products. UKTI LICENSING BROCHURE 0354022 UKTI License BroAW.indd 3 14/01/2011 16:50
  4. 4. key AdVAntAGeS of LicenSinG oVeR otheR StRuctuReS Many companies look at joint ventures or partnerships and collaborations especially when considering developing overseas markets. The big problem with joint ventures and similar vehicles is that the parties become jointly responsible for a number of issues, such as finances and management of the company, when in practical terms it is likely to be more commercial for one party to have responsibility for certain decisions alone. Joint ventures can work well but they are inherently flawed in terms of joint management decisions and this is often where disputes arise. On the other hand, licensing permits the exploitation of new technology without the burden of managerial decisions for both parties. Having said that, however, it is important for both licensor and licensee to understand commercially where the markets lie and to agree a joint marketing strategy of some kind in order to achieve maximum sales. Unfortunately joint ventures often fail as they require a like-minded business culture, which can be difficult to achieve – especially in an overseas market where business practices, attitudes and cultural values can vary widely. Joint ventures can also be extremely expensive to set up as the legal costs involved may be significant. There are countries, however, where it is impossible to trade unless one has a local party who is domiciled in that country. An arms length licence may avoid such problems. 04 LICENSING BROCHURE54022 UKTI License BroAW.indd 4 14/01/2011 16:50
  5. 5. AdvANTAGES dISAdvANTAGES A licence allows a company to take a product to It is important for the company to find the right partner market without the expense of setting up locally and to licence with in a local situation. Understanding all the risks and costs associated with that. what an overseas partner can do is essential to making licensing a success. UK Trade & Investment can help in finding the right individual or company. A larger and more powerful licensee in a new market It is important to ensure that there are proper control can provide instant market access and deter provisions in the licence. It is especially important with competitors and imitators. licensing to have a well-drafted licence drawn up by experts. The licence should contain things such as full audit provisions and as licensor it may be important to police those audit provisions. A licence can be used to enable products to be In the long term, royalty payments from a licence may supplied locally where there is no opportunity to not provide the maximum return for a licensor. It could manufacture in the locality. be that setting up locally can generate better profits in the long run. It is possible with the right kind of licence and overseas It is absolutely key to the success of the licence for business partner to create an extensive market presence it to be properly negotiated and drafted. Licensing very early on in the product’s life cycle. This will help can be a complex arrangement and it is important for make maximum profits for the licensor. a licensor to be properly guided in terms of royalty payments, audit provisions and minimum sales. In certain circumstances it is possible to divide up a The licensor is often required to provide technical particular market so that different companies can licence assistance and training in brand standards etc. the same product but apply it in different areas. For depending upon where the licensee is based. This will example, it is possible to take disinfection kits and divide need to be factored into the licensing arrangements. up the market into human and animal markets then find different companies with the right market presence. It is possible to work with a licensee in a foreign The licensor must be satisfied that the licensee can market and learn from them. For example, it may be make a local market from the products. Some products possible to improve products or to adjust them so that are more popular in some cultures than in others. they meet local market needs. This can often be done early on in the product’s life cycle to help achieve better market coverage. An overseas licensee may well save a lot of expense in terms of research and development. For example, reciprocal licensing in the car and telecommunications industries enables companies to exploit the fruits of research carried out by one company alone. Where well known brands are licensed overseas, the local licensee can take advantage of an established brand with a known name and goodwill. It is very important for the licensor to ensure that brand standards are maintained in an overseas market. It is possible to negotiate further income streams from support services and training. LICENSING BROCHURE 0554022 UKTI License BroAW.indd 5 14/01/2011 16:50
  6. 6. HOW TO BE SUCCESSFUL WHEN LICENSING In the first instance the key to any successful contract chef WoRkS is to find the right business partner. Successful licensees Chef Works has been manufacturing and may come from an existing pool of associates, such distributing chefs apparel and clothing for as suppliers, manufacturers and agents already in over thirty five years and began exporting the target market. Beware, however, of not doing 15 years ago from its initial base in South Africa. your research. Make sure any partner has the right infrastructure and reputation locally to take the project The business comprises various companies forward. Do some “due diligence” on the company by owned by the founding family plus numerous reviewing their company accounts and legal structure. independent distributors across the globe. Meet with key members of staff and find out what Clothing is manufactured in Southern Africa, future plans the company has. Ask yourself whether China and Bangladesh. or not key staff members are likely to move on, taking valuable market information and customers with them. A new company has been created to house all the intellectual property which consists of a variety it is also important to consider the impact of trademarks and a design right registration. of licensing on your business. do you Licensing is key to the company’s intellectual have people in place that can trouble property strategy and is held in an off shore holding company. shoot or assist in the success of the venture. is it appropriate to set up a The company enjoys the following benefits: number of consultation days in which 1 It has a clear system of registering and protecting you provide your expertise to make sure its brand. items are manufactured and sold to 2 The IP is held in one company to ensure no your specification? how hands on do disputes evolve regarding creation and ownership. you want to be in an overseas market? 3 The company has the opportunity of licensing to Will you need a local go-between third parties in the future should it wish to do so, because of language or cultural barriers? 4 The licensing process is simple, Both parties need to be clear about the structure of 5 The assets of the holding company can be valued any licence. Heads of terms should be put forward due to the income stream, pro-actively from day one. In addition your business needs to consider the worst case scenario. How would 6 The ringfencing and valuation of IP could enable both parties walk away in a dignified manner if the the company to seek a higher valuation in the relationship just does not work? Be clear with your event of a takeover/ flotation, licensees as to what you expect. If you want a minimum 7 The IP holding company is ring fenced from any royalty or sales, then say so from the beginning. of the trading companies thus ensuring a high Remember that different cultures have their own level of asset protection. traditions and culture, and even language can be open to varying interpretations. UK Trade & Investment can help companies overcome some of these issues as they know the local business people and can be a source of invaluable information not available elsewhere. 06 LICENSING BROCHURE54022 UKTI License BroAW.indd 6 14/01/2011 16:50
  7. 7. Finally, get advice from expert lawyers and accountants. toP 10 tiPS foR neGotiAtinG LicenSeS What royalty figures will work for you and how and 1 when will they be paid? The royalty rate of 5% of Consider the type of licence that you are net sales is frequently negotiated in many industries, going to grant, e.g. exclusive, non-exclusive including automative, chemical, communications, or sole licence, and whether it should be computers, defence, energy, electronics, food, limited by field of use and/or territory. 2 franchises, glass, household products, mechanical, medical, photography, sports, toys and waste treatment. Consider carefully whether the licensee will Higher royalty rates, for example above 15%, exist be able to sub-license to a third party and in some industries, but they are rare and are usually on what basis. associated with profitable technologies or where 3 higher margins can be justified. A specialist lawyer and Consider asking a licensee to enter into a accountant will help steer you through the minefield non-disclosure / confidentiality agreement of “net” versus “gross” royalty payments and how before disclosing any information. to calculate them. They will also advise on upfront payments and minimum and maximum royalties. 4 This is by far one of the most complex areas of Have a clear licensing strategy for who you negotiation and one which heavily influences the are going to license to – consider whether profitability of the licensor. It may be expensive to you need to establish a clear advantage in the get advice, but getting the basics wrong will prove marketplace before licensing to competitors. far more expensive in the long run. 5 Remuneration for a licensor can be by way of a license fee or by way of royalties. Decide on what basis the licensee will be expected to make payment. 6 If you are providing a license of your technology consider if you will provide the licensee with technical assistance and support and if you will charge for these services? 7 Consider a clause dealing with ownership of any improvements in licensed technology. 8 Duration of licence – how long will the licence last? 9 Ensure the licence agreement clearly sets out the circumstances in which the arrangement may be terminated and consequences of termination. 10 Consult specialist accountants or solicitors for advice on the value of your intellectual property and the terms of the licence agreement. LICENSING BROCHURE 0754022 UKTI License BroAW.indd 7 14/01/2011 16:50
  8. 8. KEEPING THE PROJECT MOVING FORWARD Once you have got your licensing project up and honeymAn GRouP running, it is important to maintain a good dialogue with and ongoing support for your licensee. Regular The Honeyman Group is a UK based consultancy input on marketing strategy can be a useful way not company operating in the pharmaceutical and just of steering your product, but also of gaining biotechnology sectors. Over the past few years, insight into what is happening in other markets. If your the company has successfully developed new process licensee gets useful feedback from customers, or indeed technology for which it obtained some worldwide develops the product for a local market, then you will patent and trade mark protection. The potential and need to know. scope for this technology went beyond the existing UK and Irish markets of the company’s core business Regular visits will also reduce the likelihood of being activity, and it also had the potential to move into hoodwinked over royalty payments. It is often quite several other market sectors. A strategy needed easy to do a quick audit and see if the licensee is to be developed to move the company forward really being honest about what they sell. But it is maximising rollout efficiency and returns. almost impossible to do this from afar. A regular visit will also flush out why something is or is not working The method chosen by the Honeyman Group in a particular market. Poor sales could be due to was to first spin out the IP into a new company. a number of reasons – not just poor performance “NewCo” was formed as a vehicle with the specific of the local licensee. It can also help both parties purpose of rolling out the technology across the plan what sales targets are realistic going forward. World and was geared to this task, unlike the core If the licensee provides raw materials or products consulting business which clearly was not. As part then this information will help business planning of the process, NewCo gave an exclusive license back back in the UK to ensure figures for required materials to the core business to use the technology in the UK is accurate for the forthcoming period. It will also and Irish pharmaceutical and biotechnology sectors, be useful information for investors, the bank and so there was no effective change for the existing other interested parties such as shareholders. business. Thus, NewCo was able to enter discussions with a number of potential licensees and partners A good accountant who knows about licensing can around the world, and was free and unencumbered help with things such as establishing benchmarks for in these negotiations towards optimising the overall sales and profit. They can also help establish auditing outcome on a case-by-case basis. patterns and identify the best payment mechanisms for licensors. By way of example, payment of royalties Whilst IP was at the heart of this operational may be best done in sterling rather than risk the strategy, its use also enabled the Honeyman Group vagaries of currency fluctuations. It may be better to optimise its wider business and commercial for cash flow purposes to be paid monthly rather objectives in areas such as equity, funding, than quarterly. You may also need to bear in mind and tax planning. whether or not certain countries can actually make Trevor Honeyman, chairman of the Honeyman payments overseas and how quickly. If you suspect Group Ltd says: – “Overall, we are very happy with royalties have not been paid correctly, the licence the outcome which made best use of IP to deliver agreement should contain an audit clause that will our long-term goals and objectives”. allow you to instruct an accountant to check the books and records of your licensee. 08 LICENSING BROCHURE54022 UKTI License BroAW.indd 8 14/01/2011 16:50
  9. 9. AN INTRODUCTION TO FRANCHISING Franchising is a much abused term in the English In order to avoid legal pitfalls and getting tied into language. It is used to describe many business onerous terms it is important to have the support you relationships but, in its true legal sense, it is a particular need from experienced legal advisors and accountants. form of licensing. Franchising usually occurs where one Some franchise agreements contain unfair obligations company has a tried and tested product and business and liabilities on you as the franchisee. Remember the model. This tried and tested business can then be rolled old adage an ounce of prevention is worth a pound out to other potential businesses on a nationwide or of cure. Other business support organisations may also indeed international basis. Franchising is particularly be able to offer you advice and guidance on setting up popular in the USA. such a business. Successful franchising occurs in a range of industries and often works well where there is a customer service element as well as a recognised product and brand. Examples of successful franchising include McDonalds as a fast food retailer and AutoGlym which sells car care products. In franchising the “know-how” of a business i.e. its underlying business strategy is key to its success. Franchising works particularly well where the franchisor advertises on a national basis and brings a well-known, tried and tested brand to the market. The franchisee gets the benefit of a head start in business by selling well-known goods and services. In simple terms a franchise is a sophisticated know how and trade mark licence. In order to maintain brand standards the franchisor will often control the supply chain and direct that products are sourced from specific suppliers and are sold in a particular way. The franchisor may also specify things such as staff training and may coordinate new customer enquiries which will come in via their national network. As with licensing, franchising can be extremely flexible and can work very well for both parties provided that the franchise agreement is drafted fairly. Franchisees pay a royalty for the benefit of using the brand, the know-how and the franchisor’s expertise. In return the franchisor gets the benefit of nationwide market penetration and can enjoy considerable success from a royalty stream. Exhibitions are held around the country where you can visit businesses offering a franchise and discuss how it works. The British Franchise Exhibition is one. Attending a show like this can give you the opportunity to have an initial look at what is on offer and is also the source of valuable advice and information. LICENSING BROCHURE 0954022 UKTI License BroAW.indd 9 14/01/2011 16:50
  10. 10. WHERE TO GO FOR ADVICE AND SUPPORT ciA WoRLd fActBook uk trade & investment is the Government The US Central Intelligence Agency (CIA), publishes organisation that supports both companies information on many key characteristics of world in the uk trading internationally and markets. Categories include economy; people; geography; communications, transportation overseas enterprises seeking to locate and the military. in the uk. our role is to help companies realise their international business potential through knowledge transfer, and inteLLectuAL PRoPeRty office on-going partnership support. our position Information regarding copyright, design, trademarks within Government, in-depth knowledge of and patents. uk regional business and a global network make us a unique strategic resource. LicenSinG eXecutiVeS Society inteRnAtionAL uk tRAde & inVeStment The Licensing Executives Society International Extensive information on all UK Trade & Investment (LESI) is an association of 33 national and regional services including a section on Investing Overseas. societies, each composed of men and women For more information, visit who have an interest in the transfer of technology, or licensing of intellectual property rights – from technical know how and patented inventions foReiGn And commonWeALth office to software, copyright and trademarks. Country information and up-to-date travel advice. hm ReVenue And cuStomS (hmRc) HMRC provide a wide range of information and guides to assist companies trading overseas. Guides include introductions to import & export; classifying your goods; reliefs and exemptions; monthly updates on tariffs, duty schedules and trade statistics. doinG BuSineSS – the WoRLd BAnk GRouP Contains individual country and regional profiles which focus on regulations, protection of property rights and constraints with quantitative indicators for each. coRRuPtion PeRcePtion indeX Produced by Transparency International Limited, and providing an index of the perception levels of corruption worldwide. 10 LICENSING BROCHURE54022 UKTI License BroAW.indd 10 14/01/2011 16:50
  11. 11. ELIzABETH WARD PRINCIPAL VIRTUOSO LEGAL Liz Ward is Principal at Virtuoso Legal, a specialist legal practice. Liz is acknowledged as a “Leader in her field” by the 2010 edition of Chambers and is also ranked in the Legal 500. Liz has specialised in Intellectual Property and Information Technology law and her expertise encompasses an in-depth knowledge relating to patents, trade marks, copyright, design rights, software and confidential information. The work undertaken by Virtuoso Legal includes both litigation in the High Courts and also licensing software, know-how, technology and brands in order to make income streams for companies. A member of the Chartered Institute of Patent Agents (CIPA) and the Institute of Trade Mark Attorneys (ITMA), Liz is also currently Chair of the North East Section of the Licensing Executives Society (LES) and regularly lectures and writes on matters relating to IP law. For more information: LICENSING BROCHURE 1154022 UKTI License BroAW.indd 11 14/01/2011 16:50
  12. 12. ACCESSING INTERNATIONAL MARKETS A range of uk Government support is available from a portfolio of initiatives called Solutions for Business. the “solutions” are available to qualifying businesses, and cover everything from investment and grants through to specialist advice, collaborations and partnerships. uk trade & investment is the government organisation that helps uk-based companies succeed in the global economy, and is responsible for the delivery of the two SfB products “developing your international trade Potential” and “Accessing international markets”. We also help overseas companies bring their high-quality investment to the uk’s dynamic economy – acknowledged as europe’s best place from which to succeed in global business. uk trade & investment offers expertise and contacts through its extensive network of specialists in the uk, and in British embassies and other diplomatic offices around the world. We provide companies with the tools they require to be competitive on the world stage. for further information please visit or contact us at our regional office below: uk tRAde & inVeStment yorkshire & humber Victoria house, 2 Victoria Place, Leeds LS11 5Ae tel: 0113 394 9825 fax: 0113 394 9834 email: Whereas every effort has been made to ensure that the information given in this document is accurate, neither uk trade & investment nor its parent departments (the department for Business, innovation and Skills (BiS), and the foreign & commonwealth office), accept liability for any errors, omissions or misleading statements, and no warranty is given or responsibility accepted as to the standing of any individual, firm, company or other organisation mentioned. the paper in this document is made from 50 per cent genuine waste pulp and 50 per cent ecf pulp from well managed forests. the inks are vegetable oil-based and contain resins from plants/trees and the laminate on the cover is sustainable, compostable and can be recycled. Published January 2010 by uk trade & investment © crown copyright. Published october 2010 by uk trade & investment © crown copyright uRn 10/1180 - A Guide to Successful Licensing54022 UKTI License BroAW.indd 12 14/01/2011 16:50